Earnings Call Transcript - AGI Q3 2023

Scott Parsons, Senior Vice President of Investor Relations

Good morning. I will now turn the call over to Scott Parsons, Alamos' Senior Vice President of Investor Relations. Please go ahead. Thank you, operator, and thanks to everybody for attending Alamos’s third quarter 2023 conference call. In addition to myself we have on the line today John McCluskey, President and Chief Executive Officer, Greg Fisher, Chief Financial Officer, Luc Guimond, Chief Operating Officer, and Scott R.G. Parsons Vice President of Exploration. We will be referring to a presentation during the conference call that is available through the webcast and on our website. We'd also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to our cautionary notes included in the presentation, news release, and MD&A as well as the risk factors set out in our Annual Information Form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President Technical Services, and a qualified person. Also please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now John will provide you with an overview.

John McCluskey, President and Chief Executive Officer

Thank you, Scott. Starting with Slide 3, we delivered another strong quarter with production of 135,400 ounces, exceeding quarterly guidance at costs near the low end of annual guidance. This reflected a solid quarter from Island Gold and another excellent quarter from La Yaqui Grande. With year-to-date production of 400,000 ounces, we are on pace to achieve a new annual record driven by an outstanding year from the Mulatos district. Given the strong performance we are increasing our production guidance by 5% to a new range of 515,000 to 530,000 ounces. We are also on track to achieve our cost guidance for the year with total cash costs and all-in sustaining costs both below the midpoint of guidance year-to-date. It was also a solid quarter financially, putting us on pace for a record year across a number of metrics including revenue and cash flow from operations. This is giving us the capacity to both grow as a company and generate solid free cash flow, including $37 million in the quarter and $109 million year-to-date. Now looking at Slide 4, we continue to create value from within our growth projects. In August, we released an updated feasibility study on the Lynn Lake Project with a 44% increase in reserves supporting a larger, longer life low-cost operation with attractive economics. As part of our balanced approach to growth, our current focus is on the Phase 3+ Expansion at Island Gold. But Lynn Lake remains a key part of our longer-term growth plans as another long-life low-cost project in Canada with significant exploration upside, which we expect will further enhance the economics of the project. In September, we provided another exploration update from Mulatos, where we continue to extend high-grade mineralization at PDA. We expect this exploration success to drive a further increase in higher-grade reserves and resources at the deposit beyond the million ounces defined at the end of last year. This growth has been incorporated into a development plan to be completed later this year, which we expect will outline another attractive project and significant mine life extension of Mulatos. Construction of the Phase 3 Expansion at Island Gold is advancing well, with the headframe substantially complete and shaft sinking on track to start by year-end. The project remains on schedule and on budget, and we expect to be operating from the shaft and extended mill in the first quarter of 2026. These projects are key drivers of our strong outlook, supporting growing production, declining costs, and increased profitability. I'll now turn the call over to our CFO, Greg Fischer to review our financial performance.

Greg Fisher, Chief Financial Officer

Thank you, John. On Slide 5, during the third quarter we sold 133,000 ounces of gold at an average realized price of $1,932 per ounce, $4 above the London PM fix for revenues of $256 million. Total cash costs of $835 per ounce and all-in sustaining costs of $1,121 per ounce are both towards the low end of full-year guidance. We are on track to once again achieve full-year cost guidance. Our reported net earnings of $39 million in the third quarter are $0.10 per share, including unrealized foreign exchange losses of $12 million recorded within deferred taxes and other non-cash losses of $3 million. Excluding these items, our adjusted net earnings were $55 million or $0.14 per share. Operating cash flow before changes in non-cash working capital was $133 million or $0.34 per share. Given our solid production growth and margin expansion this year, we're on pace for a record year in terms of revenue, earnings, and cash flow from operations. This is driving strong free cash flow generation at a time that we were also investing in growth. This includes $37 million of free cash flow in the quarter and $109 million year-to-date. We expect the strong free cash flow generation to continue while funding the Phase 3+ Expansion. Capital spending totaled $75 million in the quarter and included $27 million in sustaining capital, $42 million of growth capital, and $6 million of capitalized exploration. Through the first nine months of the year, capital spending totaled $239 million consistent with our annual guidance. We paid cash taxes of $3 million in the quarter at Mulatos, with a similar payment anticipated in the fourth quarter. We expect significantly higher cash tax payments in Mexico in 2024, reflecting the strong profitability of Mulatos in 2023, and the $115 million of free cash flow generated from the operation year-to-date. Our balance sheet continues to improve with our cash balance growing to $216 million, a 14% increase in the previous quarter and a 66% increase since the start of the year. We remain debt-free and well-positioned to fund our growth initiatives. I will now turn the call over to our COO Luc Guimond to provide an overview of our operations.

Luc Guimond, Chief Operating Officer

Thank you, Greg. Moving to Slide 6, Young-Davidson produced 45,100 ounces in the quarter, consistent with the previous few quarters with record milling rates of 8,200 tonnes per day, offsetting slightly lower grades. Costs were in line with annual guidance, both in the quarter and year-to-date. Grades are expected to increase in the fourth quarter as we move to higher-grade zones that had been deferred from the third quarter. This is expected to drive production higher in the fourth quarter, putting the operation on track to achieve full-year production and cost guidance. The operation continues to be a consistent performer with mine-site free cash flow of $31 million in the quarter and $83 million year-to-date. For the third consecutive year, Young-Davidson is on track to deliver more than $100 million in free cash flow. Over to Slide 7, Island Gold produced 36,400 ounces in the quarter, a 19% increase over the second quarter, reflecting both higher grades and tonnes processed. It was a strong quarter operationally with mining and milling rates both increasing to exceed annual guidance of 1,200 tonnes per day. This helped drive costs down from the second quarter towards the low end of annual guidance. Given the strong year-to-date performance, including production of 100,000 ounces, the operation is well positioned to achieve full-year production and cost guidance. Over to Slide 8, work on the Phase 3+ Expansion continues to progress with the focus on completion of the remaining shaft site surface infrastructure. Construction of the headframe is substantially complete as is the construction of the shaft area substation. Pre-commissioning tests on the E-house electrical systems have commenced, and construction of the warehouse is well underway. The hoisting gallery is over 50% complete, putting the shaft sinking on track to start by year-end. Over to Slide 9, a total of $35 million of capital related to the Phase 3+ Expansion and capital development was spent in the quarter. The expansion remains on budget with 45% of the total initial capital of $756 million spent and committed to the end of September. With the shaft site surface infrastructure nearing completion, spending will shift towards the shaft sinking later this year, and the mill expansion plan into next year. The overall expansion remains on track to be completed in 2026, transforming Island Gold into one of the largest, lowest-cost, and most profitable mines in Canada. Moving to Slide 10, at Mulatos, production of 53,900 ounces was down from the second quarter as guided, reflecting the return to design mining rates for La Yaqui Grande and mining within the main Mulatos pit. La Yaqui Grande continued to outperform, with rates exceeding guidance due to positive grade reconciliation. Mine-site free cash flow was $31 million in the quarter, and an impressive $115 million year-to-date. As previously guided, production is expected to decrease in the fourth quarter reflecting the end of the Mulatos pit and a decrease in grades to guided levels at La Yaqui Grande. With year-to-date production of 164,700 ounces, Mulatos is on track to exceed its full-year guidance driven by the strong outperformance from La Yaqui Grande. Costs are expected to increase in the fourth quarter but remain within guidance for the full year. Moving to Slide 11, as John noted, the updated feasibility study on the Lynn Lake project has outlined a bigger, longer life, and more attractive operation relative to the 2017 study. The updated study incorporates a 44% larger mineral reserve and a 14% larger mill at 8,000 tonnes per day. Production over the first 10 years is expected to average 176,000 ounces per year, up 23% from 2017, at lower all-in sustaining costs of $699 per ounce. Over the last several years, we have completed an extensive amount of additional engineering, geotechnical, and other work, including obtaining approval of the Environmental Impact Statement back in March. This work has significantly de-risked the project, providing us with a high degree of confidence in the capital and operating cost estimates. These estimates support attractive base case economics for the project, and our current gold prices represent a 22% after-tax internal rate of return. We also see significant upside potential given several near-mine and regional exploration opportunities that could be incorporated into the project. Under the current mine plan, the MacLellan and Gordon deposits will be mined over the first 11 years. For the remaining six years, we will be processing lower grade stockpiles. With our fleet of mining equipment available from years 11 onward, we are evaluating several nearby targets such as Burnt Timber and Linkwood as additional sources of mill feed. These deposits represent upside to the feasibility study as they would help sustain higher rates of production well beyond the first 10 years. To review that upside in more detail, I will turn the call over to our VP of exploration, Scott R.G. Parsons.

Scott Parsons, Vice President of Exploration

Thank you, Luc. Over to Slide 12. In August, we provided an exploration update at Lynn Lake, highlighting the significant upside potential across a number of near mine and regional targets. This includes Burnt Timber and Linkwood, two deposits in proximity to the planned mill and MacLellan that could potentially be incorporated into the mine plan. They're located approximately 28 kilometers away from the MacLellan site and are connected by an all-season road. The two deposits contain 1.6 million ounces of inferred resources that were not factored into the feasibility study. Updated geological models have been completed on both deposits, demonstrating the potential for a smaller, higher quality mineral resource. We see excellent potential disruptors to MacLellan built infrastructure after the MacLellan deposits is in line. This would not only help sustain higher rates of production well beyond the first 10 years but also extend mine life and enhance project economics. Maynard is a similar stage target with similar potential as another satellite deposit located 20 kilometers by road from the planned mill. All 15 holes drilled at Maynard to date have intersected gold mineralization over a 700-meter strike length and to a depth of 280 meters. This includes higher grade intercepts of up to 5.9 grams per tonne over 12 meters. These are just a few examples of the potential we see across the Lynn Lake Greenstone Belt, a large underexplored district. We are starting with a 17-year reserve life based on the updated study. However, given the opportunities we see across our 58,000-hectare land package, we fully expect mining in the district well beyond that. Over to Slide 13. In September, we announced the second exploration update at Mulatos, where we continue to have success both regionally and near mine. At PDA, step-out drilling has further extended high-grade mineralization beyond reserves and resources, which will support additional growth beyond the currently defined 1 million ounces. We are currently working on an updated reserve based on drilling to the end of July and we’ll be incorporating that in an updated development plan to be completed towards the end of the year. We expect it to outline another significant mine life extension in Mulatos. Based on the success of the program to date, we've increased our exploration budget in Mulatos for the second time this year to $25 million. This includes drilling at PDA through the rest of this year with 50,000 meters planned, up from the original budget of 16,000 meters. We are still in the early stages of testing the potential within the broader PDA area. Based on success to date, and with the deposit open in multiple directions, we see excellent potential for PDA to continue to grow in the years ahead. We also released additional results from the Capulin regional target, located 4 kilometers east of the Mulatos pit. Step-out drilling continues to intersect wide intervals of significant oxide and sulfide mineralization within a breccia along the Capulin Fault. This included 2.7 grams per tonne over 121-meter core length, the best hole drilled to date at Capulin, highlighting significant potential in that area and within the broader Mulatos district. With that, I’ll turn the call back to John.

John McCluskey, President and Chief Executive Officer

Thank you, Scott. That concludes the formal presentation. I will now ask the operator to open the lines for your questions.

Operator, Operator

Our first question is from Cosmos Chiu. Please go ahead. Your line is open.

Cosmos Chiu, Analyst

Thank you, John, Greg, Luc, Scott, and Scott. Congrats on a very strong Q3. It's good to see that you were able to increase your guidance for the year on production costs and production. Maybe first off in Mexico. As you mentioned, La Yaqui Grande has done really well year-to-date with positive grade reconciliation. But at the same time, you say that the grade will likely trend back to more normal levels. But I just want to know, what happened? Why were you able to have the positive grade reconciliation? Is there a potential for it to continue?

Luc Guimond, Chief Operating Officer

Hi, Cosmos. Luc here. Our expectation is that we will be more in line with our grades as we move forward; we won't necessarily see that over-performance. What's really happening is as we get deeper into the benches of La Yaqui Grande, the drill density gets tighter, so we expect to see more consistent performance, actual versus our model moving forward.

Cosmos Chiu, Analyst

Understood. And then maybe sticking with Mexico, there’s quite a bit of noise these days in the country regarding security issues for some of your peers or the ongoing potential changes to mining law. Could you talk about whether there’s been a potential impact on Alamos?

John McCluskey, President and Chief Executive Officer

Hi, Cosmos, it’s John. I would say that you can never rule anything out given, you know, it could happen in Canada. I think everyone recalls we had a big gold heist at our airport here at Pearson. So I don't think you can ever rule anything out from that point of view. But I would say that we've been operating in Mulatos for a long time. We've significantly increased security over the last five years. On top of that, the Mexican government has stepped up security in the region quite significantly. There's a lot of mining operations in this part of Mexico, and I would say the Mexican government cares a great deal about that. I don’t see anything particularly unusual about where we're operating. I think it’s as secure as it's ever been. We've been operating there for 22 years now; we've been in production for 19 of those years and we've only ever had one real incident. So I would say looking forward we’re pretty confident that our site continues to operate without any unusual impacts.

Cosmos Chiu, Analyst

Okay, sounds good. Maybe switching gears to Island Gold. It sounds like the Phase 3+ Expansion is going well; it sounds like surface infrastructure is almost complete. When it comes to shaft sinking, can you talk about some of the key deliverables and risks in terms of what the next stage of a project entails? Clearly, you have done the shaft sinking at La Yaqui Grande in the past. Does that help? Can you talk about what we should expect with the next stage of shaft sinking with the expansion?

Luc Guimond, Chief Operating Officer

Yes, Cosmo. Luc here. So, we're in the final stages of actually gearing up the shaft to be able to start the sinking. Our expectation is that we will start that by the end of Q4 and get into the shaft on a consistent basis, obviously, and continue with the benching aspect. We're using a reputable contractor at Redpath Mining, which has done shafts all over the world, certainly in Canada, but all over the world. So you know, we’re not concerned about them being able to deliver on what their expectations are. Once they get the setup completed and the cycle going, our expectation is that we would be sinking at about three meters per day over the next couple of years until the shaft is completed late 2025.

Cosmos Chiu, Analyst

Thanks. And then maybe one last question, Greg, as you mentioned, very profitable in Mexico this year, which also means a larger tax bill next year. Could you remind me when does that margin payment come out? When would it come due? How can we estimate what that payment is going to look like?

Greg Fisher, Chief Financial Officer

Yes, Cosmos, it’s Greg here. So yeah, the year-end tax filing is due in March. So the payments for the 2023 tax bill will be due in the first quarter of 2024. This will relate to both income taxes and mining taxes. We have paid about $3 million this year, including $3 million in the third quarter and a similar amount in the fourth quarter. Given our profitability, there will be a pretty significant catch up when we file that tax bill in March of 2024.

Michael Parkin, Analyst

Thanks, guys. And congrats on a great quarter. Could you just speak to the Island project? What is the critical path? What's budgeted in there? Do you have any flexibility on adding shifts if you show any signs of falling behind schedule?

Luc Guimond, Chief Operating Officer

Hi, Mike. Luc here. As I mentioned earlier, our main focus has been on the shaft setup and sinking in preparation for that. The headframe and everything is also progressing. We are in the final stages of preparing to begin the shaft sinking, and we expect to start that process in Q4. We have a reputable contractor with a strong expertise to complete this on time and within budget, and we fully anticipate their success. Additionally, we've been working on the detailed engineering for the mill expansion and the paste plant as part of the Phase 3+ Expansion. These efforts have been ongoing this year, and we will move into more substantial construction efforts next year and into 2025 for both components. We also need to upgrade our existing power distribution to the site, which will involve essentially doubling our load. We are currently focused on that as well to have a construction timeline ready when the other components of the Phase 3+ Expansion are completed, aiming for a startup by the end of Q1 2026.

Michael Parkin, Analyst

Right. Follow up for Greg, can you remind me what was the budgeted Canadian dollar? I know you are looking to take advantage of the current weaker Canadian dollar versus budget. Could you just help give us a bit of additional tailwind on that project?

Greg Fisher, Chief Financial Officer

Yes, we had budgeted at $0.75. So the weaker Canadian dollar will help from a CapEx perspective but also on our operating costs throughout our existing operations.

Michael Parkin, Analyst

And can you remind me roughly what percentage of the CapEx would be Canadian? I guess probably all your labor and contractor would mostly be in CAD. I imagine it's pretty high.

John McCluskey, President and Chief Executive Officer

Mike, I'll have to get back to you on that. I don't have the details right now. But I'll take that offline.

Michael Parkin, Analyst

Thanks for the update. There is some exciting news expected later this quarter regarding PDA. Can you share any information about the recent addition of a million ounces to the total resource? You've increased the drilling budget multiple times this year, considering the July cut-off, which suggests that progress is substantial. Do we have any insight into the scale of the project? Is there a possibility it could be phased, such as implementing a Phase 1 and then adding a second processing line in the mill as it develops? What can you share with us?

Luc Guimond, Chief Operating Officer

Mike, Luc here again. Yes, so it's still early stages. We've just recently completed some geotech drilling required for the mine design aspect of the operation. In that mine design, we'll put a mine plan together. We've also been working in conjunction with technical studies regarding the metallurgy and the mill design. Our expectation is that we will have a development study completed by the end of the year with some preliminary numbers regarding mining rates and supporting milling rates. High level at this point, we have been targeting 2,000 tonnes per day based on the success we've had with exploration and some early reviews of our mine and mill design. But there's always opportunity for expansion. We can certainly start on that basis with the mining week; it can increase over time if supported based on the geometry of the ore body and the strengthening of the ore body. Obviously, there’s a chance to expand the mill to support a higher mining rate if required.

Michael Parkin, Analyst

And do you guys have power to site now or will you have it by the time you would build PDA?

Luc Guimond, Chief Operating Officer

We're currently still on diesel generation. But we're in the process of converting from diesel generation power to grid power and our expectation is that will be by the end of this year. That will provide obviously further upside for the longer term of La Yaqui, but also with PDA and any other opportunities to develop within our Mulatos district.

Michael Parkin, Analyst

Okay, so the PDA study would assume grid power connection.

Luc Guimond, Chief Operating Officer

Correct.

Ovais Habib, Analyst

Hi, John and Alamos team, congrats on the Q3 beat and increase production guidance, just a couple of questions for me. Number one, in regards to the parallel structures that were covered at Island Gold, during the site trip in mid-summer, you mentioned that you had already started to mine some of these structures. Are we expected to see some of these ounces from the structures in Q4 and going into 2024? What I'm trying to ask is, are these ounces expected to come into the Island Gold mine plan in the future?

Luc Guimond, Chief Operating Officer

Hi. Yes, it's Luc here again. Yes, I mean, we have started mining some of those parallel zones in the north-south zone that we've talked about previously. So we started some of that late in Q3, and there's an opportunity to bring some more of that into Q4. But as we further understand it and develop it, we’ll actually start to incorporate this into the mine plan over the longer term.

Ovais Habib, Analyst

Okay, sounds good. So, in terms of what you see in the firewall structure, they're closer to existing operations, so it's not like you'd have to do a lot more development to access these zones?

Luc Guimond, Chief Operating Officer

No. Because these are running off of the east-west striking zones that we're currently mining. And from a sequence perspective, it actually makes more sense to incorporate these into the mine plan as we're in those areas, just from the point of view of following a proper sequence and being able to extract and retreat from those areas based on our mining method.

Ovais Habib, Analyst

Thanks for the color on that, Luc. Just switching gears to PDA, just following up on Mike's question. I believe the expectation is to release a new mine plan in Q1 next year. Regarding the advancement of PDA, what kind of permits will be required, and do you see any risk to those permits?

Luc Guimond, Chief Operating Officer

Sorry, that was in relation to PDA.

Ovais Habib, Analyst

That's correct.

Luc Guimond, Chief Operating Officer

As I mentioned earlier, we're looking to have a development study by the end of the year, by the end of Q4 or Q1 at the latest. Regarding permits, all mining and milling operations will be within our existing concessions. It would just be a question of getting an amended permit, basically, which is what it's referred to in Mexico due to the fact that it's not new processes. We’ve done underground mining there in the past. It's not new to the district, and we had a conventional milling process in the past as well. So that's not new to the district. As a result of that, we would just be looking to get amendments to our existing permit to be able to construct the new requirements for the mining and milling operations for PDA.

Kerry Smith, Analyst

Thanks, operator. Luc, for the Phase 3 at Island, you have $162 million for development underground, and you've completed $64 million. Can you just remind me how many meters of development is included in that $162 million number?

Luc Guimond, Chief Operating Officer

I say it's at least a couple of kilometers plus, on that one, Kerry. I have to get back to you to get a more firm number. But that's in relation to all of the shaft access development and all the other development required to establish that infrastructure, including crushing rock truckers, loading pockets, everything associated with all of that infrastructure for the underground. But I'd have to get back to you with a firm number on that.

Kerry Smith, Analyst

Okay. And are you doing that development with your own crews?

Luc Guimond, Chief Operating Officer

Correct. For the most part, we do still have Redpath doing some of the development shaft ramp access development, but starting next year, it'll be 100% Alamos development crews.

Kerry Smith, Analyst

Yes, okay. So those costs should be pretty much in line because you're using your own teams. Okay, thank you. And then maybe for Scott, the 444 meters of underground drifting that you had planned for the exploration underground at Island, is that pristine all complete in hours? Or is there still some more of that to complete this year?

Greg Fisher, Chief Financial Officer

I mean, Kerry, it’s ongoing throughout the year, sequenced into the development testimony. We were advancing laterally at the west and east side of the deposits on multiple levels, and then also on our hanging wall exploration, drift and 945. So we’ll do it systematically as we get going to establish a drill-off the targets from that drill bay will advance the development as required. So it's kind of ongoing throughout the year.

Kerry Smith, Analyst

Okay, I got you. And then Greg, just clarify the $2.7 million of cash taxes you paid at Mulatos in Q3, and then you're forecasting a similar amount in Q4. Those will be pre-payments against the taxes due in March of next year, correct?

Greg Fisher, Chief Financial Officer

Correct. Those are installment payments with respect to our 2023 tax bill.

Kerry Smith, Analyst

Right. Okay, perfect. Thanks very much.

Operator, Operator

Thank you. There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932. You may now disconnect.